Manufacturing Accounts. - David Wilson

1 Manufacturing Accounts. 2013 Question 1. Question 1 is a fantastic opportunity every year to pick up lots of marks (almost one third of the entire exam!), so loads of people obviously give a huge amount of time to preparing for it. Unfortunately however, one of the options that can come up in question 1 ( Manufacturing Accounts ), is sometimes neglected by students and they can therefore end up with a nasty shock if it appears on the paper. I ve tried my best to explain the 2013 higher level question below but please remember that I m assuming you have fully covered the normal types of question 1 first (Company and Sole Trader). If you haven t done these topics yet, stop reading and come back to Manufacturing Accounts when you re pretty confident with the normal options.

2 Finally, you ll need some paper to work through this answer so go back to my notes page before we begin and print out the Manufacturing Template and also the Final A/C Template . Right, let s So there s good news and bad news about Manufacturing Accounts. On a positive note, it s basically just a Trading and Profit & Loss account and Balance Sheet, so if you re already good at these you won t have a problem at all. The slight downside is that there s an extra section we have to be able to do before we launch into the T&P&L account . Ultimately therefore, it s just a case of learning how to do this extra section at the start, and then the rest of the question is just a normal Final account . If you look at the 2013 Question (Marjam Ltd), you ll notice that there s some stuff in the trial balance that we don t normally see in a company or sole trader Q1.

3 Things like Work in Progress or Raw Materials might look a bit odd to you. The explanation is that whenever we ve done a Q1 before, it has been for a business that buys products ( Purchases ) and then resells them ( Sales ) for a profit. The difference with a Manufacturing account Q1 is that these companies make their own products ( They don t purchase them). The purpose of the extra section we need to do at the start (the Manufacturing account ) is to work out how much it cost the company to make their products this year. David Wilson The two rules to remember are: -If you spot something in the question that doesn t normally go in a question 1, it almost certainly goes in the Manufacturing account .

4 -We re trying to work out a total cost here so all of the things we re looking for are basically expenses or things we ve spent money on to make our products. Hopefully you have the blank template for doing Manufacturing Accounts beside you (if not, go to my notes page and print one). You ll be able to see the layout that is used to work out the total cost of manufacture. Don t panic about the order things are written in the account , once you get everything in there somewhere, you should end up with the correct total. Let s take it section by section on my template and see if we can make sense of it First up, we seem to have a heading for Raw Materials . I think it s pretty obvious that this is a cost associated with Manufacturing our products so it should be easy to remember to start with this.

5 To get a figure for what we spent on raw materials this year we essentially get purchases of raw materials, add opening stock and minus closing stock. You ll see in the template that there s also a space for Carriage on Raw Materials because if the trial balance gives us a figure for this, it s an extra cost for us from getting our raw materials. In the 2013 question we Raw Materials. Opening Stock 34400 Purchases 991600 Carriage In 4600 Closing Stock -35700 994900 Let s see where all this came from. The opening stock of raw materials and the carriage on raw materials are both straight from the trial balance. The closing stock is also really straightforward - look at adjustment (i).

6 The only thing needing a small David Wilson explanation is the purchases of raw materials (which looks like 1,035,000 in the trial balance but is 991,600 in our answer above). There are two reasons for the difference. Firstly, in adjustment (iii) 400 of a repair was parts taken from our raw materials. Like in other topics, when stock of anything is lost, stolen, damaged, taken by the owners, etc, we need to subtract this from Purchases . I know that sounds weird but basically the word purchases in accounting means things we buy that we get to re-sell (or in a Manufacturing account , things we buy that we get to use to make our product). So if the owners use raw materials for some other purpose, we can t count them as Purchases of Raw Materials because we re not getting to use them to make our products.

7 The second reason for the change in purchase of raw materials is a figure of 43,000 that we are subtracting because of adjustment (iv). This is the classic sale of a van adjustment that we always see in Q1 but because this is a Manufacturing account , they ve called it a sale of machinery. It s the exact same though. At the end of the adjustment we re told that the new machine we bought cost 51,000 and that we got an allowance (or trade-in) of 8,000 for our old machine. We re then told that the cheque for the balance ( 51,000 - 8,000 = 43,000) was incorrectly recorded as the purchase of raw materials (which it wasn t), so we need to subtract it. If you re still hanging in there, then you re doing fine.

8 That s about a third of the Manufacturing account covered. My advice would be not to move on until you re completely happy working out how to do the raw materials bit. Maybe pick another Q1 Manufacturing account , have a go at the raw materials section and then check the solution to make sure you have it right. Once you re happy, let s look at the middle Direct Factory Wages 178800 Depreciation Plant & Machinery 29325 Depreciation Land & Buildings General Factory Overheads 31400 239525 David Wilson Ok, so what s going on here? Right so remember that all of this stuff is in the Manufacturing account because it s connected to making our products. That s why you ll notice things have titles like Direct factory wages (ie They make it clear it s to do with making the product by mentioning the word factory ).

9 If you see an expense in the trial balance and you re not sure that it s to do with Manufacturing , then just put it in the normal expenses section of the P&L account . In the section above, we start with factory wages and you ll notice that the 178,800 figure is different from the 180,400 figure in the trial balance. The reason is in adjustment (iii). Basically we repaired some machinery and it cost 2000 (so that should be counted as repairs and we ll put that at the bottom of the Manufacturing account near the end). The problem is that they didn t record it they way they should have and instead they recorded 400 of it as purchase of raw materials (remember we fixed this a few minutes ago?) and they recorded the other 1,600 as wages.

10 Basically we simply take this 1,600 away from factory wages. Why? Because factory wages should be the figure for how much we pay our staff to make our products, NOT what we ve paid them to fix faulty machinery . Ultimately this adjustment is asking us to record the repair where it should be ( 2,000 repairs in the Manufacturing account ) and to undo the wrong thing they did originally (which was recording 400 of it as purchase of raw materials and 1,600 as wages). So next comes depreciation of plant and machinery. This goes in the Manufacturing account because we obviously use machinery to make our products. If we are asked to depreciate vehicles or furniture or anything like that, these figures would go in the normal expenses section of the P&L account (because they have nothing to do with making the product).